Are Patent-Holding Companies Holding Innovation Hostage?

The so-called “patent wars” have evolved over the past ten years from occasional spats over intellectual property rights into ghosts haunting every aspect of the software and technology industry. Billions in settlements and millions more in legal fees constitute an economy predicated on the idea that if you invent it, you own it. For years the system has protected the rights of inventors and motivated researchers to develop new technologies with a profit incentive.

The role that patents play in technology and business has been getting increased attention lately as patent wars between tech giants escalate. This week, a trial between Microsoft (NASDAQ:MSFT) and Google’s (NASDAQ:GOOG) Motorola unit ended with one of the final expert testimonies claiming that Microsoft will make $94 billion in revenue through 2017 on devices that use Google’s patented wireless technology. The lawsuit emerged because of disagreements over the royalty rates Microsoft should pay for use of the technology: Google wants $4 billion per year, while Microsoft wants to pay $1 million, claiming the technology is essential to operate in the industry.

A standard-essential technology is subject to regulation stating that it must be licensed out fairly. Even to a company as large as Microsoft, $4 billion per year for the license would push up the cost of its products, cut into margins, and inhibit competition.

Prohibitively high royalty fees are just one way that patents threaten the marketplace. As seen in the lawsuits being filed by Apple (NASDAQ:AAPL), infringing on patents that cover software features or characteristics (rounded edges, aspects of the swipe function, etc.) that are widely used in an industry can force a company to stop selling a product, or pay massive settlements.

The standing logic is that patents are a necessary legal architecture to support and protect innovation, but the fallout from the patent wars and growing concerns of affected technology companies has ignited a debate that will reach United States antitrust authorities at the Justice Department and Federal Trade Commission.

Regulators will sit down for informal meetings with Cisco Systems (NASDAQ:CSCO), Nokia (NYSE:NOK), and Intellectual Ventures Management, a patent-holding company co-founded by former Microsoft CTO Nathan Myhrvold, to “understand the industry better,” according to FTC chairman Jon Leibowitz.

Complicating issues and helping to inspire the sit-down is a common practice among technology companies where they develop a technology, patent it, and then transfer that patent to a holding company that then sues its competitors. While the nature of patents themselves is hotly debated, the talks are likely to skim over the philosophical debate on intellectual property and try to find a pragmatic way of ending patent gamesmanship.

The Wall Street Journal reports that federal regulators will be investigating whether patent-holding companies that don’t make products but instead earn revenue through royalty fees help or hurt innovation. Often called “patent trolls,” holding companies are notorious for suing tech companies for infringing on the patents they hold. Seeking huge settlements, these companies have the ability to shut down operations as large as Research in Motion’s (NASDAQ:RIMM) BlackBerry service, which almost happened in 2006.